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Fitch Affirms Nomura and Daiwa; Upgrades VR of Nomura Holdings
October 25, 2017 / 5:19 AM / a month ago

Fitch Affirms Nomura and Daiwa; Upgrades VR of Nomura Holdings

(The following statement was released by the rating agency) TOKYO, October 25 (Fitch) Fitch Ratings has today affirmed the Long-Term Issuer Default Ratings (IDRs) on the following entities at 'A-'; their Outlooks are Stable: - Nomura Holdings, Inc. (Nomura Holdings) and its wholly owned subsidiary Nomura Securities Co., Ltd. (Nomura Securities), which are jointly referred to as Nomura - Nomura Financial Products & Services, Inc. (NFPS), a wholly owned subsidiary of Nomura Holdings - Daiwa Securities Group Inc. (Daiwa Securities Group) and its wholly owned subsidiary Daiwa Securities Co. Ltd. (Daiwa Securities), which are jointly referred to as Daiwa Furthermore, Fitch has upgraded the Viability Rating (VR) on Nomura Holdings to 'bbb+' from 'bbb'. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS IDRS AND SENIOR DEBT The IDRs of Nomura Holdings, Nomura Securities and NFPS are driven by their Support Ratings (SRs) and Support Rating Floors (SRFs). The senior debt ratings of Nomura Holdings, and the ratings on the guaranteed senior note programme of Nomura Bank International plc (NBI) and the guaranteed senior note programme of Nomura International Funding Pte. Ltd. (NIF) are aligned with the support-driven IDRs of Nomura Holdings. The IDRs of Daiwa are driven by their SRs and SRFs. Daiwa Securities' senior debt ratings are aligned with its support-driven IDRs. The Stable Outlook reflects the Stable Outlook on Japan's sovereign rating (A/Stable), which underpins the IDRs. Fitch views that the Japanese economy has stabilised, backed by stronger-than-expected domestic demand, tight labour market, increase in global trade and supportive fiscal policy. VRs The VRs for Nomura and Daiwa reflect their superior market positions within the domestic financial system and strong capitalisations, which compare favourably with that of many global universal bank and broker dealer peers. Nomura Holdings' Fitch Core Capital ratio was about 20% and Daiwa Securities Group's was about 25% at end-June 2017. Fitch expects their capitalisations to remain consistent with peers, if not better, after upcoming regulatory changes. Fitch applies its Global Bank Rating Criteria and Global Non-Bank Financial Institutions Rating Criteria to assess the VRs on Nomura and Daiwa because of their role in the Japanese financial system, the regulatory oversight in Japan of these two businesses, their access to lender of last resort facilities in Japan, and their designation as domestic systemically important financial institutions in Japan by the authorities. Rating constraints include Fitch's view of the cyclicality of the company's business model and reliance on wholesale funding. The improved performance of Nomura Holdings in the financial year ended March 2017 (FYE17) and first quarter of FYE18 reflects the steps taken to exit more challenging areas of its overseas operations. Nomura's efforts to reduce market risk are also reflected in lower value-at-risk (VaR) and its VaR to FCC ratio of 0.12% at end-June 2017 compared with 0.24% at end-March 2015. Nomura Holdings' profits improved and were less volatile largely due to its focus on strengthening and streamlining its overseas operations, which turned profitable. Fitch expects Nomura's overseas operations to remain profitable. Nomura Holdings, as the holding company of the group, will continue to have larger overseas operations than Nomura Securities, and, as a result, greater exposure to risks and regulations as well as larger contingent liabilities. However, Fitch upgraded the VR on Nomura Holdings because we see that Nomura Holdings' profit is gradually becoming as stable as that of Nomura Securities due to streamlining of overseas operations and a sustained reduction in market risk. Nomura Holdings oversees and centrally manages the group's capital and liquidity. Daiwa's overseas operations have improved, but the effect on its overall performance has been limited because the overseas operations are small relative to the group. The VRs of Daiwa Securities Group and Daiwa Securities are equalised, reflecting the group's flat structure with Daiwa Securities being the single core operating subsidiary focused on the domestic market. Domestic profits have been under pressure for both Nomura and Daiwa, due to low market volatility and subdued investor sentiment in the domestic retail equity market. However, a focus on stable sources of revenue and operations helped overall profitability to remain adequate. These initiatives have mitigated the earnings volatility from the market-driven brokerage businesses. Both groups continue to focus on expansion of stable revenue sources that are not asset intensive by strengthening their asset and wealth management businesses. However, the rising competition among major players will make execution of their strategies challenging. The VRs also factor in their improved funding profiles, which are shifting towards longer term, more diversified sources and more spread-out maturities. Nomura and Daiwa continue to rely more on market-sensitive wholesale funding than commercial banks. However, the companies have sufficient liquidity to continue operations without additional unsecured external financing for at least one year. The companies have access to unsecured liquidity facilities from BOJ (similar to the Japanese banks) when necessary. Fitch does not assign a VR to NFPS as its operation is highly integrated with the parent and it could not exist without participation in the group's trading businesses. SUPPORT RATING AND SUPPORT RATING FLOOR The affirmation of the SRs and SRFs for Nomura and Daiwa reflects Fitch's view that the two groups continue to play key roles in Japan's financial system, backed by their leading franchises. Their SRs and SRFs factor in the government support available to Nomura and Daiwa under the Deposit Insurance Act (DIA), revised and effective since March 2014. The revision includes a resolution framework and pre-emptive measures to prevent failure of non-bank financial institutions that are considered by Japanese authorities as systemically important. Nomura and Daiwa, designated as domestic systemically important financial institutions by the authorities, are extremely likely to receive financial support from the government under the DIA, if required. The '1' SR of NFPS takes into account Fitch's belief that there is an extremely high probability of support from Nomura Holdings, if necessary, given a high degree of integration between NFPS and key entities within the group. NFPS performs a central role in the group by providing a platform to book multiple-currency transactions in the group's global wholesale unit. If the group faced severe financial difficulties, including stress arising from NFPS, the government is highly likely to provide support to Nomura Holdings, and such support is likely to flow through to NFPS, if required, given its critical role of booking various derivative products with various counterparties in the group. The equalisation of the SRs and SRFs between the parents and subsidiaries for Nomura and Daiwa is based on the consolidated supervision by Japanese authorities under the Financial Instruments and Exchange Act. This, combined with the interconnectedness of Nomura and Daiwa within their respective groups, leads Fitch to believe the authorities would extend financial assistance directly, if required, to a holding company and such support would be expected to flow through to core subsidiaries, as necessary. RATING SENSITIVITIES IDRS AND SENIOR DEBT The IDRs of Nomura and NFPS, senior debt ratings of Nomura Holdings and ratings on the senior note programmes of NBI and NIF are driven by Nomura Holding's SR and SRF. Therefore, those ratings would move together with changes in the SR and SRF of Nomura Holdings. Daiwa's Long-Term IDRs and Daiwa Securities' senior debt ratings are driven by the respective SRs and SRFs. Thus, changes of the SRs and SRFs would lead to changes in their Long-Term IDRs and senior debt ratings. SUPPORT RATING AND SUPPORT RATING FLOOR The '1' SRs and 'A-' SRFs on Nomura and Daiwa are sensitive to perceived changes in the sovereign's ability and propensity to support the financial institutions. A change in Fitch's assessment on the systemic importance of Nomura or Daiwa, derived from factors such as increased substitutability of an entity due to downsizing of operations or transactions, could result in the downgrade of the SRs and SRFs. For NFPS, a downgrade of the SR would be considered if its functions within the group were to be substantially revised and its position as an integral part of the group receded. Also, a decrease in Nomura Holdings' propensity to provide support, such as due to reduced ownership, would result in the downgrade of NFPS's SR. VRs For both Nomura and Daiwa, a sustained improvement in the stability and level of profitability stemming from a lower cost structure and further strengthening in stable revenue sources would be a positive influence on the VRs. The rating attributes of the VRs of Nomura and Daiwa are broadly stable. A material pick-up in risk appetite without a corresponding increase in capital buffers would weigh on the VRs. The rating actions are as follows: Nomura Holdings: - Long-Term Foreign- and Local-Currency IDRs affirmed at 'A-'; Outlook Stable - Short-Term Foreign- and Local-Currency IDRs affirmed at 'F1' - Viability Rating upgraded to 'bbb+' from 'bbb' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' - Senior debt affirmed at 'A-' Nomura Securities: - Long-Term Foreign- and Local-Currency IDRs affirmed at 'A-'; Outlook Stable - Short-Term Foreign- and Local-Currency IDRs affirmed at 'F1' - Viability Rating affirmed at 'bbb+' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' NFPS: - Long-Term Foreign- and Local-Currency IDRs affirmed at 'A-'; Outlook Stable - Short-Term Foreign- and Local-Currency IDRs affirmed at 'F1' - Support Rating affirmed at '1' NBI: - Note, warrant and certificate programme affirmed at 'A-' The programme rating is only applicable to notes guaranteed by Nomura Holdings. The rating does not cover unguaranteed notes and other instruments issued under the programme. NIF: -Note, warrant and certificate programme affirmed at 'A-' The programme rating is only applicable to notes guaranteed by Nomura Holdings or Nomura Securities. The rating does not cover unguaranteed notes and other instruments issued under the programme. Daiwa Securities Group: - Long-Term Foreign- and Local-Currency IDRs affirmed at 'A-'; Outlook Stable - Short-Term Foreign- and Local-Currency IDRs affirmed at 'F1' - Viability Rating affirmed at 'bbb+' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' Daiwa Securities: - Long-Term Foreign- and Local-Currency IDRs affirmed at 'A-'; Outlook Stable - Short-Term Foreign- and Local-Currency IDRs affirmed at 'F1' - Viability Rating affirmed at 'bbb+' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' - Senior debt and programme affirmed at 'A-' Contact: Primary Analyst Naoki Morimura (Nomura) Director +81 3 3288 2686 Fitch Ratings Japan Limited Kojimachi Crystal City East Wing 3F 4-8 Kojimachi, Chiyoda-ku, Tokyo 102-0083 Kaori Nishizawa (Daiwa) Director +81 3 3288 2783 Secondary Analyst Naoki Morimura (Daiwa) Director +81 3 3288 2686 Kaori Nishizawa (Nomura) Director +81 3 3288 2783 Committee Chairperson Mark Young Managing Director +44 20 3530 1318 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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